The grain futures markets are hardly recognizable; since peaking in 2012, we've seen the price of corn, wheat, and soybeans decline into a treacherous slump. Not surprisingly, subdued pricing has been plagued by a lack of volatility. Such an environment is difficult for both farmers and speculators; further, it is in stark contrast to the grain markets at the turn of the decade which were responsible for making some market participants rich, while others had the opposite result. Nevertheless, the commodity markets have always been a feast or famine arena and they always will be. We suspect the grain markets are due for a change of pace. Favorable odds of a La Nina weather pattern could be the catalyst.
Unlike most stocks, the primary driver for agricultural commodities is often weather. Grain traders will tell you, Mother Nature is running the show. La Nina, the weather pattern largely responsible for the high-flying grain markets of 2012 has the potential to make an appearance in 2018. In fact, some believe there is a roughly three out of four chance of this occurring. If so, the grain markets in general, but specifically corn, wheat, and soybeans, could see a significant boost in both price and volatility.
A La Nina weather event is characterized by cooler-than-normal waters in the tropical regions of the Pacific causing wetter conditions in Australia and Asia. However, the same pattern leads to dry weather in soybean growing areas in Central America and wheat growing areas in the southern US. Thus, if La Nina does materialize, soybeans and their byproducts, wheat, and even corn could see massive price increases.
Although the grain rally might not carry the same punch as the 2012 La Nina phenomenon, due to years of bumper crops and a potentially less severe weather pattern, the markets could certainly undergo a shock. To put things into perspective, in 2012 corn futures traded into the mid-$8.00 area following the La Nina wrath but are now trading in the mid-$3.00 range. Similarly, wheat traded above $9.00 in 2012 but has since declined to as low as $4.00, and the La Nina peak in soybeans near $18.00 has given way to $9.00 beans. Will the grain markets double in price? Probably not, but it is difficult to argue against the potential for a substantial repricing.
We've been eying the COT report (Commitments of Traders) issued by the CFTC (Commodity Futures Trading Commission). It is clear that grain speculators have been heavily short; ironically, their large bearish stance could be the primary contributing factor to a massive market reversal. After all, whether or not La Nina actually occurs might not matter; if she simply threatens to show up, those short the grain markets could be compelled to cover their positions (buy back futures contracts). This would theoretically put surprisingly swift upward pressure on grain prices. In essence, if the majority of speculators have already sold, the selling will likely dry up and those sellers will eventually need to buy back their short futures to offset obligations with the exchange. In my view, those who have been comfortably short the grain markets for months might soon be extremely uncomfortable. We believe the best trade will be from the mindset of getting bullish on dips.